It’s mid-March, which, in the sports world, means picking winning teams for NCAA basketball tournament brackets and, in the estate-planning world, means preparing gift tax returns—an equally exciting proposition for estate planners. Following the NCAA’s expansion of the men’s tournament field in 2011 to 68 teams, the Treasury expanded Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return (gift tax return), with the insertion of Schedule C, Deceased Spousal Unused Exclusion (DSUE) Amount (Schedule C).
DSUE Amount
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, a temporary 2-year tax patch, introduced the concept of “portability” and the DSUE amount. The American Taxpayer Relief Act of 2012 made portability permanent. Generally, portability allows a surviving spouse to add the DSUE amount from his last deceased spouse to the amount that the surviving spouse can exclude from gift1 and estate taxes.2
The technical definition of the “DSUE amount” is the lesser of the following amounts—(1) the basic exclusion amount in effect in the year of the death of the decedent; or (2) the excess of—(A) the decedent’s applicable exclusion amount; over (B) the sum of the amount of the taxable estate and the amount of the adjusted taxable gifts of the decedent, which together is the amount on which the tentative tax on the decedent’s estate is calculated under Internal Revenue Code Section 2001(b)(1).3 In other words, the DSUE amount is, generally, the unused portion of a decedent’s applicable exclusion amount to the extent this amount doesn’t exceed the basic exclusion amount in effect in the year of the decedent's death.4 The “basic exclusion amount” is the amount that has been traditionally referred to as the “exemption amount” or, more technically, the “applicable exclusion amount,” which is $5 million, indexed for inflation to the nearest multiple of $10,000.5 However, with portability, the "applicable exclusion amount" is now the sum of the basic exclusion amount and the DSUE amount, if any.6
To obtain a DSUE amount, the executor of the last deceased spouse must make an election on a timely filed Form 706, United States Estate (Generation-Skipping Transfer) Tax Return, to transfer the DSUE Amount to the surviving spouse—called the “portability election.”7 The surviving spouse may apply the DSUE amount during life or at death.8 When the surviving spouse makes a taxable transfer, the surviving spouse’s DSUE amount is applied before his basic exclusion amount.9 Furthermore, as odd as it may sound, an individual may take advantage of multiple DSUE amounts by repeatedly applying the DSUE amount of the last deceased spouse before a new spouse dies.10 On the other hand, if an individual is ported a DSUE amount, but such individual’s new spouse dies before applying the DSUE amount from the prior spouse, the surviving spouse loses the DSUE amount from the prior spouse.11 (Notably, this is very similar to an upset of a top seeded team in an NCAA tournament game!)
Expansion of the Gift Tax Return
The Treasury added Schedule C to the 2012 gift tax return to track the DSUE amounts applied during the lifetime of a taxpayer and calculate the applicable credit amount. Again, mirroring the NCAA, the addition of the DSUE amount to the applicable credit amount is similar to the addition of the 3-point line to college basketball in the 1986-1987 season: another “game changer.”12
DSUE amount on the prior gift tax return. The first year of portability (when a DSUE amount could be applied) was 2011 because the law only affects the surviving spouses of decedents dying after Dec. 31, 2010.13 The 2011 gift tax return doesn’t even mention the DSUE amount. However, the 2011 instructions for Form 709 acknowledge the advent of the DSUE amount. As a part of the explanation for calculating the maximum unified credit, the 2011 instructions advise taxpayers to add the DSUE amount to the basic exclusion amount to determine the applicable exclusion amount. A brief description of the DSUE amount follows the explanation of the calculation of the applicable exclusion amount on the 2011 instructions. Similar to the NIT post-season basketball championship, which is always overshadowed by the NCAA tournament, the DSUE amount received little coverage in the 2011 gift tax return and instructions.
DSUE amount on the new gift tax return. This year, with a new Schedule on the gift tax return, Schedule C, the Treasury highlights the importance of accounting for the DSUE amount by taking it from a mere mention in the box score to a SportsCenter top play nominee. However, as any good coach would say after a player aired on SportsCenter, a quick glance at the tape reveals that there’s room for improvement. In Schedule C, there’s a column G that’s “Reserved,” along with lines 3 and 6 through 10 of the calculation of the applicable credit amount. Furthermore, the Treasury has corrected and clarified the 2012 Instructions for Form 709. Similar to the development of a basketball player from freshman year to senior year, Schedule C will undoubtedly develop from its first incarnation this year.
Filling Out Schedule C
A surviving spouse that has received a DSUE amount from a predeceased spouse must complete Schedule C.
Total DSUE amount. Under Part 1 of Schedule C, the surviving spouse must provide the information concerning the application of the DSUE amount from his last deceased spouse. Column A requires the name of the deceased spouse. Column B requires the date of death of the deceased spouse. Either the “Yes” or “No” box, indicating whether or not the deceased spouse applied for portability, must be checked in column C. If portability was elected, the surviving spouse must provide, in column D, the amount of the DSUE amount that was received. Column E requires the total amount of the DSUE amount applied by the gifts currently being reported, as well as prior gifts. Although the 2012 instructions for Form 709 state to the contrary, the instructions, as corrected and clarified, match the requirement that the date of the gifts be inserted in column F.
Part 2 of Schedule C tracks the surviving spouse’s DSUE amounts received from predeceased spouses, if any, prior to the last deceased spouse. The columns of Part 2 require the same information as Part 1, except that the information would pertain to the application of the DSUE amount from each predeceased spouse prior to the last deceased spouse. At the bottom of Part 2 of Schedule C, the surviving spouse inserts in column E the total for all DSUE amounts applied in Parts 1 and 2.
Total applicable credit amount. The surviving spouse uses the lines under Parts 1 and 2 of Schedule C to calculate the total applicable credit amount. Line 1 requires the surviving spouse’s basic exclusion amount, $5.12 million in 2012 (indexed for inflation to $5.25 million in 2013). The total DSUE amount from the box at the bottom of column E must be provided in line 2. The sum of that total and the basic exclusion amount must be provided in line 4. The surviving spouse must provide, in line 5, the applicable credit amount on the sum from line 4, using the Table for Computing Gift Tax, which is on page 17 of the 2012 Instructions for Form 709. This applicable credit amount from line 5 of Schedule C is the same number to be entered on line 7 of Part 2—Tax Computation on page 1 of the gift tax return. As mentioned above, lines 3 and 6 through 10 are “Reserved” and not to be used for this year’s gift tax return.
Here to Stay
Unlike a freshman phenom that plays one year of college basketball and leaves to join the NBA, Schedule C is here to stay and should evolve each year, as implied by its “Reserved” boxes. Good luck with the brackets!
Endnotes
1. Treasury Regulations Section 25.2505-1T(a).
2. Treas. Regs. Section 20.2010-1T(d)(2).
3. Treas. Regs. Section 20.2010-2T(c)(1).
4. Internal Revenue Code Section 2010(c)(4); Treas. Regs. Section 20.2010-1T(d)(4).
5. IRC Section 2010(c)(3).
6. IRC Section 2010(c)(2).
7. Treas. Regs. Section 20.2010-2T(a).
8. Treas. Regs. Section 25.2505-1T(a).
9. Treas. Regs. Section 25.2505-2T(b).
10. Treas. Regs. Section 20.2010-3T(b).
11. Treas. Regs. Section 20.2010-3T(a)(2) & 25.2505-2T(a)(2).
12. See Richard S. Franklin, George D. Karibjanian and Lester B. Law, “Portability—The Game Changer,” a white paper for the Estate and Gift Tax Committee of the Income and Transfer Tax Planning Group of the Real Property Trust and Estate Law Section of the American Bar Association (Jan. 2013) (dubbing portability as “the game changer”).
13. IRC Section 2010(c)(4).